Celsius bankruptcy judge ruling says account holders don’t own their accounts


More than half a million people who deposited money with the collapsed crypto-lender Celsius Network have had their hopes of getting their money back severely damaged after a judge ruled in the company’s bankruptcy case that the money belongs to Celsius, not the depositors.

Judge Martin Glenn found that Celsius’ terms of use – the lengthy contracts that many websites publish but few consumers read – meant that “the cryptocurrency assets became the property of Celsius”.

The ruling highlights the wild west nature of the unregulated crypto industry. On Thursday, New York Attorney General Letitia James moved to impose some sort of injunction, or at least legal responses, against Celsius founder Alex Mashinsky, who has been accused of defrauding hundreds of thousands of consumers.

Crypto fortunes have plummeted in recent months since Celsius became the first major crypto platform last year, with losses in July amounting to at least $4.2 billion to 600,000 Americans, according to court papers, and showing FTX’s collapse four months later.

And while Glenn’s ruling did not affect FTX’s terms of use, some analysts saw the ruling as expanding beyond Celsius.

“There are many other platforms that have similar terms of use to Celsius,” said Aaron Kaplan, a lawyer at Gusra Kaplan Nussbaum, a financial-focused firm and the founder of his own crypto company. He said customers should understand the risks they are taking when they place their assets on platforms that are not adequately regulated.

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James’ lawsuit alleges Mashinsky used “false and misleading representations.” [customers] The lawsuit seeks unspecified damages from Mashinsky and seeks to bar him from various financial and other operations in New York.

Celsius spokesman Luke Wolff said Mashinsky is no longer involved in the company’s management. Mashinsky did not respond to a message seeking comment.

For years, Celsius has promised extremely high interest rates in the neighborhood of 20 percent to people in a virtual version of a real-world bank, leaving many with no interest in crypto to enter the market.

The lawsuit alleges that Mashinsky was the cause. Through “hundreds of interviews, blog posts and live broadcasts,” Mashinsky promoted Celsius as a safe alternative to banks while hiding risky investment strategies.

The Frozen Secret of Crypto: The Fate of Billions in Celsius Storage

Mashinsky was known for his regular “Ask Mashinsky Anything” Q&A online and t-shirts with messages like “Banks Are Not Friends.” Many fans on YouTube and Twitter have praised “The Machine’s” cult. If FTX’s Sam Bankman-Fried was the public face of crypto in the halls of Washington, Mashinsky was often the most popular symbol for ordinary investors.

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The indictment paints a picture of a man intent on portraying himself as a hero to the unbanked and the working class, while most of those people’s money was used to fund high-risk investments.

“Positioning himself and his company as a modern-day Robin Hood, Mashinsky says Celsius ‘provides a product … for people who can’t make it themselves; [and] We will take from the rich,” the charge said. “These promises were false.”

According to the bankruptcy court, however, the legal system may have limits on what crypto companies can do when they have enough knowledge to protect themselves. Investors and several states that have joined their lawsuits say the language is at least “ambiguous” about the rights granted to Celsius. But Glenn disagreed.

Celsius’ attorneys, Joshua Susberg and Patrick J. Nash Jr. and attorneys for the creditors, Gregory Pesce and Andrea Amulik, did not respond to requests for comment.

The bankruptcy ruling focused specifically on whether Celsius, as part of its restructuring, could sell its current $18 million in stablecoins, a form of virtual currency that would help it stay afloat. But the implications are huge. The court ruled that the funds in the accounts were not actually held by the 600,000 account holders, who were essentially unsecured creditors. And “there won’t be enough value to pay it back,” Glenn writes.

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The results could also affect other crypto platforms that have strict language in their fine print beyond them – presenting problems for customers in the event of a crash.

“This raises another question about how difficult it is to do business in the Wild West of crypto,” said Brian Marks, who teaches economics and business law at the University of New Haven’s Pompey College of Business and has studied the Celsius case.

The relationship between crypto companies is vast, and failures of one can spill over into another even months later. On Thursday, the crypto lender Genesis said it will lay off 30 percent of its employees, partly due to the loan of Alameda Research, a sister company of FTX.

Celsius’ lenders were also hit by FTX’s bankruptcy. Mashinsky’s former company, the New York lawsuit said, agreed to lend $1 billion to Alameda in exchange for FTX token FTT.

“The price of FTT has fallen by about 95%,” he says, making Celsius a seemingly worthless holding.


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